The New Year rang in significant changes with the American Taxpayer Relief Act. The biggest change was the repeal of the sunset provision on the existing law, as well as a few other items.
Regarding federal estate taxes, this new law makes almost all of the previous tax provisions, commonly known as ”TRA 2010,” permanent, with the exception of the tax rate. This means there is an estate tax exclusion of $5 million that will be adjusted for inflation. So for 2013, the exclusion is $5.25 million. The estate tax is coupled with the gift tax and the “unified” exclusion can be used either after death or while the person is still alive, just like under TRA 2010. The tax rate is now capped at 40%, instead of the prior 35%.
The “portability” provision from TRA 2010 is also retained. This means that the estate tax exclusion amount of the first spouse to die may be used by their surviving spouse, assuming an estate tax return is filed for the pre-deceasing spouse.
Regarding state estate taxes, as with the prior law, they remain deductible rather than a credit (as was the case many years ago).
The Generation Skipping Transfer Tax (GST) exemption is set at $5 million and is also adjusted for inflation. As in the prior law, the GST exemption is not portable. Thus, the use of GST exemption, along with remarriage protection, asset protection, etc., are reasons to continue using credit shelter trusts in appropriate cases.
The new law affects everyone’s income taxes. The existing rates on incomes below $400,000 (single) and $450,000 (married, filing joint) have been set permanently to the current level. For incomes over that amount, the rate will increase from 35% to 39.6%, where it was before 2001. In addition, this income bracket will see a raise in qualified dividend and capital gain income tax rates from 15% to 20%. Those tax rates will not change for lower income amounts.
When it comes to “charitable rollover” IRAs, those provisions will be extended for 2012 and 2013 only. This means that an individual over age 70 ½ can give up to $100,000 from their IRA without taking that amount into income. For clients making large charitable gifts from an IRA, this is good news because the deduction for a normal contribution, without the benefit of a “charitable rollover,” may be capped or not offset the income.
As we know, in many ways, Congress basically just kicked the can down the road for a few months which left us with a lot of unanswered questions. In reviewing the expedited law, we see many areas that are in limbo at this time. It does not appear that Congress addressed any of the “sequestration” spending issues and the debt limit hasn’t been raised. It remains to be seen what cuts the President, the Democratic Senate, and the Republican Congress are ready to agree to, if any. If they aren’t willing to make big cuts, they will be back looking to raise more taxes once again in a few months.